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CSC > SEC Filings for CSC > Form 10-Q on 12-Aug-2014All Recent SEC Filings

Show all filings for COMPUTER SCIENCES CORP

Form 10-Q for COMPUTER SCIENCES CORP


12-Aug-2014

Quarterly Report

PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter of Fiscal 2015 versus
First Quarter of Fiscal 2014

All statements and assumptions in this quarterly report on Form 10-Q and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking information contained in these statements include, among other things, statements with respect to the Company's financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, plans and objectives of management, management's assessment of estimates related to profitability of its long-term contracts and estimates related to impairment of contract-specific assets, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of the Company's control, which could cause actual results to differ materially from the results described in such statements. These forward looking statements should be read in conjunction with the Company's Annual Report on Form 10-K, for the year ended March 28, 2014. The reader should specifically consider the various risks discussed in the Risk Factors section included elsewhere herein.

Forward-looking statements in this quarterly report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached or incorporated by reference speak only as to the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

General

The following discussion and analysis provides information management believes relevant to an assessment and understanding of the consolidated results of operations and financial condition of Computer Sciences Corporation (CSC or the Company). The discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included herein and the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 2014. The following discusses the Company's financial condition and results of operations as of and for the first three months of July 4, 2014, and the comparable period of the prior fiscal year.

Reportable Segments

CSC is a global leader of information technology (IT) and professional services and solutions. The Company's mission is to enable superior returns on its clients' technology investments through best-in-class industry solutions, domain expertise and global scale.

The Company's reportable segments are as follows:

Global Business Services (GBS) - GBS provides end-to-end applications services; consulting; and industry-aligned software and solutions to enterprise clients around the world. GBS manages and industrializes clients' application ecosystem through its Applications Services offering. The company has formed a number of strategic partnerships with leading technology companies such as HCL Technologies and SAP to deliver world-class solutions to its customers . These partnerships will enable clients to modernize and move enterprise workloads to next generation cloud infrastructure, while leveraging the benefits of mobility, social networking and big data. The GBS consulting business assists clients in achieving greater value from current IT assets as well as aiding in the direction of future IT investments. GBS software and solutions include vertically-aligned solutions and process-based intellectual property. Clients include major global enterprises in the insurance, banking, healthcare, life sciences, manufacturing and a host of diversified industries. Key competitive differentiators for GBS include its global scale, depth of industry expertise, strong partnerships with leading technology companies, vendor and product independence and end-to-end


capabilities. Changing business issues such as globalization, fast-developing economies, government regulation, and growing concerns around risk, security, and compliance drive demand for these GBS offerings.

Global Infrastructure Services (GIS) - GIS provides managed and virtual desktop solutions, unified communications and collaboration services, data center management, cyber security, compute and managed storage solutions to commercial clients globally. GIS also delivers next-generation hybrid Cloud infrastructure solutions to clients. The company integrates public cloud offerings from Amazon Web Services, Microsoft, and VMware, with its industry-leading private cloud solution, BizCloud. The CSC Agility Platform enables enterprises to manage, monitor, and automate applications over heterogeneous and hybrid clouds. The GIS portfolio of standard offerings delivers measurable results while reducing business risk and operational costs for clients. Collaboration with key alliance partners helps CSC to determine the best technology road map for clients and opportunities to differentiate solutions, expand market reach, augment capabilities, and jointly deliver impactful solutions.

North American Public Sector (NPS) - NPS delivers IT, mission, and operations-related services to the Department of Defense, civil agencies of the U.S. federal government, as well as other foreign, state and local government agencies. Commensurate with the Company's strategy of leading the next generation of IT services, NPS is leveraging our commercial best practices and next-generation offerings to bring more cost-effective IT solutions to government agencies which are seeking efficiency through innovation. This approach is designed to yield lower implementation and operational costs as well as a higher standard of delivery excellence. Demand for NPS offerings are driven by evolving government priorities such as: 1) migration to next-generation IT solutions, which includes hybrid cloud infrastructure, application modernization and orchestration, 2) mission intelligence driven by big data solutions, 3) health IT and informatics, and
4) cyber security.


Overview

The key operating results for the first quarter of fiscal 2015 include:

Revenues for the first quarter of fiscal 2015 were $3,237 million, and decreased $17 million, or 0.5%. On a constant currency basis(1), revenues decreased $63 million, or 1.9%, compared to the first quarter of fiscal 2014.

Operating income(2) for the first quarter of fiscal 2015 was $304 million, compared to $332 million for the first quarter of fiscal 2014. The first quarter fiscal 2015 operating income margin was 9.4% compared to 10.2% for the same period of prior year.

Earnings before interest and taxes(3) (EBIT) for the first quarter of fiscal 2015 was $248 million compared to $269 million for the first quarter of fiscal 2014. EBIT margin was 7.7% compared to 8.3% in the prior year.

Income from continuing operations before taxes was $214 million for the first quarter of fiscal 2015, as compared to $234 million in the first quarter of fiscal 2014.

(Loss) income from discontinued operations, net of taxes, was $(8) million for the first quarter of fiscal 2015, as compared to $16 million in the same period of fiscal 2014.

(1) Selected references are made on a "constant currency basis" so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby providing comparisons of operating performance from period to period. Financial results on a "constant currency basis" are calculated by translating current period activity into U.S. dollars using the comparable prior period's currency conversion rates. This approach is used for all results where the functional currency is not the U.S. dollar.

(2) Operating income is a non-U.S. Generally Accepted Accounting Principles (GAAP) measure used by management to assess performance at the segments and on a consolidated basis. The Company's definition of such measure may differ from that used by other companies. CSC defines operating income as revenue less costs of services, depreciation and amortization expense, restructuring costs and segment general and administrative (G&A) expense, excluding corporate G&A and mark-to-market adjustment to pension expense. Operating margin is defined as operating income as a percentage of revenue. Management compensates for the limitations of this non-GAAP measure by also reviewing income from continuing operations before taxes, which includes costs excluded from the operating income definition such as corporate G&A, mark-to-market adjustment to pension expense, interest and other income (expense). A reconciliation of consolidated operating income to income from continuing operations before taxes is as follows:

                                                           Quarter Ended
(Amounts in millions)                             July 4, 2014     June 28, 2013
Operating income                                 $        304     $        332
Corporate G&A                                             (56 )            (64 )
Pension net actuarial gains (losses)                       (1 )              -
Interest expense                                          (39 )            (39 )
Interest income                                             5                4
Other income, net                                           1                1
Income from continuing operations before taxes   $        214     $        234

(3) Earnings before interest and taxes (EBIT) is a non-GAAP measure that provides useful information to investors regarding the Company's results of operations as it provides another measure of the Company's profitability, and is considered an important measure by financial analysts covering CSC and its peers. The Company's definition of such measure may differ from that used by other companies. CSC defines EBIT as revenue less costs of services, selling, general and administrative expenses, depreciation and amortization, restructuring costs, and other income (expense). EBIT margin is defined as EBIT as a percentage of revenue. A reconciliation of EBIT to income from continuing operations is as follows:

                                               Quarter Ended
(Amounts in millions)                 July 4, 2014     June 28, 2013
Earnings before interest and taxes   $        248     $        269
Interest expense                              (39 )            (39 )
Interest income                                 5                4
Taxes on income                               (55 )            (73 )
Income from continuing operations    $        159     $        161


Net income attributable to CSC common stockholders was $146 million, compared with $174 million in the prior year.

Diluted earnings (loss) per share (EPS) for the first quarter of fiscal 2015, was $0.98, a decrease of $0.16 as compared to $1.14 for the same period in the prior fiscal year. Diluted EPS was comprised of $1.03 from continuing operations and $(0.05) from discontinued operations, as compared to $1.03 and $0.11, respectively, for the same period in the prior fiscal year.

The Company announced total contract awards(4) of $2.7 billion for the first quarter of fiscal 2015, including $1.2 billion for GBS, $1.2 billion for GIS and $0.3 billion for NPS.

Days Sales Outstanding (DSO)(5) was 81 days at July 4, 2014, an increase from 77 days at the end of the first quarter of the prior fiscal year.

Net debt-to-total capitalization ratio(6) was 6.3% at July 4, 2014, a decrease of 0.2% percentage points from 6.3% at March 28, 2014.

Cash provided by operating activities was $273 million for the first three months of fiscal 2015, as compared to $213 million in the prior year. Cash used in investing activities was $114 million for the first three months of fiscal 2015, as compared to cash provided of $101 million in the prior year. Cash used in financing activities was $181 million for the first three months of fiscal 2015, as compared to $207 million provided in the prior year.

Free cash flow(7) of $70 million for the first three months of fiscal 2015 increased $79 million as compared to $(9) million for the first three months of fiscal 2014.

(4) Business awards for GBS & GIS are estimated at the time of contract signing based on then existing projections of service volumes and currency exchange rates, and include option years. For NPS, announced award values for competitive indefinite delivery and indefinite quantity (IDIQ) awards represent the expected contract value at the time a task order is awarded under the contract. Announced values for non-competitive IDIQ awards represent management's estimate at the award date.

(5) DSO is calculated as total receivables at the fiscal period end divided by revenue-per-day. Revenue-per-day equals total revenues divided by the number of days in the fiscal period. Total receivables includes unbilled receivables but excludes income tax receivables and long-term receivables.

(6) Net debt-to-total capitalization ratio is defined as total current and long-term debt less total cash and cash equivalents divided by total debt and equity, including noncontrolling interest.

(7) Free cash flow is a non-GAAP measure and the Company's definition of such measure may differ from that of other companies. CSC defines free cash flow as equal to the sum of (1) operating cash flows, (2) investing cash flows, excluding business acquisitions, dispositions and investments (including short-term investments and purchase or sale of available for sale securities) and (3) payments on capital leases and other long-term asset financings.

CSC's free cash flow measure does not distinguish operating cash flows from investing cash flows as they are required to be presented in accordance with GAAP, and should not be considered a substitute for operating and investing cash flows as determined in accordance with GAAP. Free cash flow is one of the factors CSC management uses in reviewing the overall performance of the business. Management compensates for the limitations of this non-GAAP measure by also reviewing the GAAP measures of operating, investing and financing cash flows as well as debt levels measured by the debt-to-total capitalization ratio.

A reconciliation of free cash flow to the most directly comparable GAAP financial measure is presented below:

                                                   Quarter Ended
(Amounts in millions)                     July 4, 2014      June 28, 2013
Net cash provided by operating           $         273     $        213
activities
Net cash (used in) provided by
investing activities                              (114 )           (101 )
Business dispositions                               (5 )            (56 )
Short-term investments                               -               (5 )
Payments on capital leases and other               (84 )            (60 )
long-term asset financings
Free cash flow                           $          70     $         (9 )


Results of Operations

Results of operations for the first quarter of fiscal 2015 were impacted by the following events:

During the first quarter of fiscal 2015, the Company changed its accounting policy for the recognition of actuarial gains and losses for its defined benefit pension and other post-retirement benefit plans and the calculation of expected return on pension plan assets. Historically, the Company recognized actuarial gains and losses in excess of 10% of the greater of the market-related value of plan assets or the plans' projected benefit obligations (the "corridor") as a component of accumulated other comprehensive loss in its Consolidated Condensed Balance Sheets and, depending on the benefit plan, the Company amortized these gains and losses to earnings either over the remaining average service period for the active participants or over the average remaining life expectancy of the inactive participants. Additionally, for the Company's U.S. plans and the Australian plan, the Company previously used a calculated value for the market-related valuation of pension plan assets, reflecting changes in the fair value of plan assets over a three-year and a one-year period, respectively. Under the Company's new accounting policies, the Company recognizes changes in actuarial gains and losses and the changes in fair value of plan assets in earnings at the time of plan remeasurement, typically annually during the fourth quarter of each year as a component of net periodic benefit expense (and the Company no longer applies a corridor and, therefore, no longer defers any gains or losses). The new accounting policies result in the changes in actuarial gains and losses and the changes in fair value of plan assets being recognized in earnings in the year they occur, rather than amortized over time, and therefore recognized earlier than under the Company's previous methods of accounting. The Company believes the new pension accounting policies are preferable as they recognize the effects of plan investment performance, interest rate changes, changes in actuarial assumptions as a component of earnings in the year in which they occur rather than amortized over time, and additionally, conform all plans to a consistent policy for determining market-related value of plan assets. These changes have been reported through retrospective application of the new accounting methods to all periods presented. The remaining components of pension/postretirement expense, primarily current period service and interest costs and expected return on plan assets, will continue to be recorded on a quarterly basis.

In addition to the above mentioned accounting policy changes, the Company also changed the way in which it allocates the elements of net periodic pension (benefit) cost to its reportable segments to be aligned with changes in how the Company's chief operating decision maker evaluates segment performance. Historically, total net periodic pension (benefit) cost, including the amortization of deferred actuarial losses/(gains) and changes in fair value of plan assets were reported within operating income, as defined by the Company, and fully allocated to reportable segments. Under the new allocation approach, the net actuarial gains and losses component of the net periodic pension (benefit) cost (mark-to-market adjustments) are excluded entirely from the Company's definition of operating income and not allocated to the reportable segments. All of the other elements of net periodic pension (benefit) cost, excluding mark-to-market adjustments, will continue to be included within operating income of the Company's reportable segments. The Company has applied the change in the allocation approach retrospectively, adjusting segment reporting for all prior periods presented (see Note 15 to the unaudited Consolidated Condensed Financial Statements).

For the impact of change in the pension accounting method, see Note 2 to the unaudited Consolidated Condensed Financial Statements.

The Company reports its results based on a fiscal year convention that comprises four thirteen-week quarters. Every fifth year includes an additional week in the first quarter of the fiscal year to prevent the fiscal year from moving from an approximate end of March date. As a result, the first quarter of fiscal 2015 had an extra week. For the additional week, the revenue impact consisted of two components. The first component of $39 million represents the amortization of fixed fee contracts, primarily in the GIS segment. This amount will normalize in subsequent quarters and will have no impact on total revenue for the fiscal year. The second is a variable component, which represents volume-based revenue and is influenced by several factors such as business mix, timing of vacations and number of holidays in the period. The variable revenue component is difficult to estimate and ranges from a very low amount to approximately $80 million, and is immaterial to full year results. Despite the variable component of extra-week revenue, CSC's costs during the extra week were largely fixed. At the upper end of the revenue range, CSC believes that cost ratios and operating margin on the incremental revenue would not be dissimilar to CSC's overall business. However, at lower levels of incremental revenue, cost ratios may have been higher and operating margin lower than CSC's overall business.


Effective fiscal 2015, the Company changed its inter-company accounting policy. Previously, inter-company transactions between segments were generally reflected as inter-company revenue. Under the new policy, inter-company transactions are now generally treated as cost transfers. The new inter-company policy has been applied retrospectively, adjusting the segment results for all prior periods. See Note 15 of the unaudited Consolidated Condensed Financial Statements.

Revenues

Revenues for the GBS, GIS and NPS segments for the quarters ended July 4, 2014
and June 28, 2013 are as follows:
                                             Quarter Ended
                                                                       Percent
(Amounts in millions)    July 4, 2014     June 28, 2013      Change     Change
GBS                     $       1,088    $         1,054    $   34       3.2  %
GIS                             1,131              1,147       (16 )    (1.4 )
NPS                             1,018              1,053       (35 )    (3.3 )
Corporate                           -                  -         -         -
Subtotal                        3,237              3,254       (17 )    (0.5 )
Eliminations                        -                  -         -         -
Total Revenue           $       3,237    $         3,254    $  (17 )    (0.5 )%

The major factors affecting the percent change in revenues for the quarter ended July 4, 2014 are presented as follows:

                                                            Quarter Ended
                                                      Approximate
                                                       Impact of
                                                        Currency        Net Internal
                                   Acquisitions       Fluctuations         Growth          Total
GBS                                       0.1 %              2.3 %           0.8  %           3.2  %
GIS                                       0.3                1.8            (3.5 )           (1.4 )
NPS                                         -                  -            (3.3 )           (3.3 )

Cumulative Net Percentage 0.1 % 1.4 % (2.0 )% (0.5 )%

Global Business Services

GBS segment revenue for the first quarter of fiscal 2015 of $1,088 million, increased $34 million or 3.2%, compared to the same period of fiscal 2014. In constant currency, revenue increased $9 million or 0.9%. The favorable foreign currency impact was primarily due to movement in the U.S. dollar against the British pound and the euro.

The revenue increases, in constant currency, for the first quarter were primarily attributable to higher software license revenue, an adverse fiscal 2014 revenue adjustments of $19 million that did not recur in fiscal 2015. These revenue increases were partially offset by a decline in GBS consulting business.

GBS had contract awards of $1.2 billion in both the first quarters of fiscal 2015 and fiscal 2014.

Global Infrastructure Services

GIS segment revenues for the first quarter of fiscal 2015 decreased $16 million or 1.4%, compared to the same period of fiscal 2014. In constant currency, GIS revenue decreased $37 million or 3.2%. The favorable foreign currency impact was primarily due to movement in the U.S. dollar against the British pound and the euro.

The decrease in GIS' revenue at constant currency for the first quarter was a result of net reduced revenue of $17 million from contracts that terminated or concluded, and reduced revenue of $76 million due to price-downs and contract modifications. These decreases were partially offset by increased revenue of $56 million from new and existing contracts.


GIS had contract awards of $1.2 billion in the first quarter of fiscal 2015 compared to $0.9 billion in the same period of fiscal 2014.

North American Public Sector

NPS segment revenues were derived from the following sources:
                                             Quarter Ended
                                                                       Percent
(Amounts in millions)    July 4, 2014     June 28, 2013      Change     Change
Department of Defense   $         562    $           595    $  (33 )    (5.5 )%
Civil Agencies                    373                405       (32 )    (7.9 )
Other (1)                          83                 53        30      56.6
Total                   $       1,018    $         1,053    $  (35 )    (3.3 )%

(1) Other revenues consist of foreign, state and local government work as well as commercial contracts performed by the NPS segment.

NPS revenue of $1,018 million for the first quarter of fiscal 2015 decreased $35 million or 3.3%, compared to the same period of fiscal 2014. The year-over-year NPS revenue decrease was due to lower revenue on both Department of Defense (DOD) and Civil Agencies (Civil) contracts. These decreases were partially offset by a revenue increase from non-federal government contracts.

The decrease in revenue from DOD contracts, included $14 million of reduced revenue on certain contracts that either had concluded or were winding down, and $20 million of reduced revenue attributable to a net reduction in tasking on existing contracts.

The decrease in revenue from Civil contracts included $18 million due to reduced scope and tasking on existing contracts, and reduced revenue of $20 million due to programs winding down or ending. These revenue decreases were partially offset by net favorable adjustments of $5 million on contracts accounted for under the percentage-of-completion method.

Increased revenue on contracts with non-federal agencies was primarily due to revenue recognition of $24 million on a state contract that was previously deferred under software revenue guidance, and a favorable adjustment of $4 million on a contract accounted for under the percentage-of-completion method.

NPS had contract awards of $0.3 billion during the first quarter of fiscal 2015, as compared to $0.7 billion, during the comparable period in the prior year. The Company expects the trend of reduced contract scopes, including reduced tasking to continue in the near term.

Costs and Expenses

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